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When starting any type of business, one of the most important decisions you will have to make is what type of company to form. A limited business is an option that a lot of company owners go for. A limited business means that you have a legal structure whereby your business is private and your owners are completely responsible by law for the debts to the extent of the amount of capital you have invested. There are a number of pros and cons associated with forming a limited company, as will be explained in further detail in this post.
What are the pros of forming a limited company?
Let’s begin by taking a look at the advantages of forming a limited company. There are a number of reasons why business owners go down this route, including the following…
- Easier business dealings – You will find that other businesses, including suppliers, will be more willing to deal with limited businesses when compared with other company forms. By being registered with Companies House, you will attain a more professional and trustworthy image, and this will assist in your dealings with other companies.
- Survival – Another benefit of forming a limited company is that you will have a separate legal entity, which is distinguished from the owner of the business. This means that your business is going to survive beyond your own existence. This is not the case for sole traders and partnerships.
- Control – When you set up a limited company, it is likely that you are going to be the sole shareholder/director, which means you will have complete control of your company. This means that you can make decisions with ease because you are not going to have the interference of anyone else.
- Security – Security is another important issue when debating limited vs umbrella, sole trader, and the other legal structures that are available. With a limited company, you benefit from some form of protection because you are registered with Companies House. No other business is going to be able to use your company name and register as a limited company.
- Tax benefits – There are also a number of tax advantages associated with forming a limited company. This includes the fact that company directors have the ability to pay themselves in dividends. Why is this beneficial? Quite simply, the tax on dividends is a lot lower than the rate you pay when you are subject to income tax. Not only this, but you will not have to make any national insurance payments on a dividend payment either.
- Limited financial liability – The final, and arguably biggest, benefit associated with a limited business is the limited liability you take on as a business owner. As a shareholder, you are only going to be liable for the debt the business racks up to the amount of the investment you first put in. Therefore, you are protected from losing assets like your home if your business takes a bad turn.
What are the cons of forming a limited company?
As is the case with anything in life, there are also a number of disadvantages associated with limited companies that you need to be aware of before you make your decision. So, let’s take a look at them in further detail…
- Publicity – This may not be deemed a disadvantage in your eyes, but for a lot of people, the publicity side of things is off putting. Once you have registered with Companies House, information about the business of the company and the company directors is made available for public viewing. This can be off-putting, but it is worth nothing that you can safeguard your home address if you are starting your business out of here. You can use a registered office service to do this.
- Withdrawals become difficult – It can be problematic when attempting to make withdrawals from the business. This is in terms of tax difficulties. The reason why issues arise is because it is hard for directors and shareholders to separate their business finances and personal finances.
- Liability – Liability is another factor to consider. Banks are still going to demand that directors provide personal guarantees.
- Accounting and reporting – This is definitely one of the drawbacks associated with forming a limited company. When compared with all of the other legal structures for businesses, limited companies have the greatest quantity of reports to submit, as well as needing to submit their annual accounts. This is necessary to protect your firm, but that does not make it any less time consuming or expensive.
- Legal obligations – Last but not least, there are a number of legal obligations placed on you as a limited company because of the benefits that are presented by the limited company form. As a company director, you will have a number of duties to fulfil to make sure you are not abusing your position or power. Two examples of this include company compliance and accounting requirements, which were touched upon in the former paragraph.
As you can see, there are a number of advantages and disadvantages when it comes to establishing your business as a limited company. There is no right or wrong answer, though; it is all about determining what is going to be right for your company. Consider each pro and con carefully to decipher whether this is a legal structure that will suit your business and your personal situation, or whether you would be better off going for another option.